Insights 
VT 
Interest rate expectations are mostly unchanged ahead of this week’s US data. However, these could shift greatly following the labour market reports.
By the end of the year, the Federal Reserve is expected to cut rates by 55 basis points, with a 90% probability of a rate cut in the upcoming meeting. The European Central Bank and Bank of England are anticipated to have no rate changes, with probabilities of 99%.
The Bank of Canada and Reserve Bank Expectations
The Bank of Canada may cut rates by 27 basis points, but there is a 53% chance of no change. The Reserve Bank of Australia is expected to reduce rates by 31 basis points, with an 83% chance of maintaining the current rate. For the Reserve Bank of New Zealand, a 38 basis point cut is probable, and the Swiss National Bank is likely to keep rates stable.
The Bank of Japan could increase rates by 15 basis points, though there is a 95% likelihood of retaining the current rate. Recent events have led to mildly hawkish expectations for the ECB and BoE, and slightly dovish ones for the BoC. Attention will be on the US labour data, specifically ADP on Thursday and NFP on Friday, as these figures pose major risks affecting interest rate forecasts.
As we begin September 2025, the market is pricing in significant Federal Reserve rate cuts before the year ends, creating a major split with other central banks. We see a 90% chance of a Fed cut at the very next meeting, which is a stark contrast to the European Central Bank and Bank of England, where no change is expected. This divergence is the central theme for our trading strategies in the coming weeks.
US Labor Market Data Significance
The main event that will either confirm or shatter these expectations is the US labor market data, especially Friday’s Non-Farm Payrolls (NFP) report. We saw this softening trend in last week’s JOLTS report, which showed job openings falling to 8.5 million, a two-year low. A weak NFP number below the consensus of 150k would solidify the case for Fed cuts and likely weaken the US dollar.
Given this binary risk, we should consider buying volatility through options on major currency pairs like EUR/USD and USD/JPY. A straddle or strangle strategy could pay off if the NFP report delivers a major surprise in either direction, causing a sharp move. The current pricing of 55 basis points in Fed cuts is substantial, and a strong jobs report would force a violent repricing.
The policy split with Europe is particularly noticeable, as August’s core inflation in the Eurozone just printed at 3.1%, well above the ECB’s target. This reinforces the view that the ECB and BoE will remain on hold, creating a clear opportunity. We could look at positioning for EUR/USD and GBP/USD strength, perhaps through call options, should the US data confirm a slowdown.
Meanwhile, Canada’s economy is showing more pronounced weakness after the second quarter GDP for 2025 contracted by 0.2%, confirming a technical recession. This dovish repricing for the Bank of Canada makes the USD/CAD pair highly sensitive to the NFP release. A strong US report could send the pair significantly higher as the economic divergence widens.
A less headline-driven trade exists in the Pacific, where the Reserve Bank of New Zealand is poised to cut rates while Australia holds steady. This suggests a relative strength for the Australian dollar against the New Zealand dollar. We could explore positioning for a higher AUD/NZD exchange rate, as this trade is less dependent on the US jobs number.
This kind of environment, with a clear central bank divergence hinging on a few data points, feels very similar to the pivot we saw in late 2023. Back then, a sudden shift in Fed expectations caused a sharp repricing across asset classes. We must be positioned for a similar increase in volatility following this week’s key reports.
